Schizophrenia and bipolar disorder are major mental illnesses that cause their victims and their families much anguish and are a major source of lost productivity and medical care expenses to our nation. Yet too little is known about them, especially about the most effective time of treatment intervention during the course of illness. The main goal of this competing R01 renewal application, which uses a prospective longitudinal study design, is to advance our knowledge of the neurophysiology of schizophrenia (SZ) (and affective psychosis) by: 1) evaluating functional abnormalities in EEG event-related potentials (ERPs) that span both early and late stages of processing, with a special focus on early auditory processing;2) integrating this information with structural MRI anatomy;and 3) integrating both ERP and MRI measures with clinical features. Findings from our work, as well as others, suggest the importance of understanding the course of the disorder. Initial data from our prospective longitudinal study of first psychotic episode subjects (FE, operationally defined as first hospitalization)have shown which demonstrate post onset progression of MRI/ERP features deficits, including brain gray matter loss and concomitant reduction of ERP functional measures. Progression is very rapid in the first 1.5 years after initial hospitalization, but much slower or even absent in chronic patients. The present application adds a second longitudinally studied population, subjects who are clinically prodromal for psychosis (PRO) in whom we propose to track progression and biopredictors of conversion to psychosis, especially SZ psychosis. Unifying our approach is our neurobiological model of a fundamental cellular defect in recurrent inhibition, based on an NMDA neurotransmission abnormality. Specifically, we hypothesize that such an abnormality may be responsible for both the developmental abnormalities observed in this disorder as well as the prodromal and post-onset progression. This cellular- based model and our preliminary data have led to an increasing focus on early-stage brain processing, especially auditory processing, as results from early processing paradigms appear to be especially amenable to correlation with brain anatomical deficits and with documentation of progression of the disorder. Finally, we will use these measures to evaluate specificity to FE schizophrenic psychosis versus FE Affective Psychosis (90% biopolar). In terms of significance, it hardly needs emphasis that, should our prediction of progression of ERP/MRI abnormalities in prodromes be confirmed and constitute predictor(s) of conversion, such findings would likely form a rational basis for psychosocial and medication therapeutic interventions. Moreover, should our preliminary findings be confirmed -rapid post-onset progression in the early course of schizophrenia with lesser changes occurring later-this would immediately form a scientific foundation for emphasis on early treatment, and perhaps prevention of progression of illness over time.